Five weeks ago, San Francisco artificial intelligence lab OpenAI released ChatGPT, a chatbot that can answer questions in clear, concise text. The AI-powered tool became an instant hit, with more than a million people using it to create everything from poetry to high school term papers to rewriting Queen songs.
Now, OpenAI is in a new gold rush.
The lab is negotiating a deal valued at about $29 billion, more than double its 2021 valuation, two people familiar with the matter said. The potential deal — in which OpenAI would sell existing company stock in a so-called tender offer — could total as much as $300 million, depending on how many employees agree to sell their stock, they said. The company is also in discussions with Microsoft — which invested $1 billion in it in 2019 — for additional funding, two people familiar with the matter said.
The clamor surrounding OpenAI shows that even in the worst tech downturn in a generation, Silicon Valley’s deal machine is still running. After a dismal year that included mass layoffs and layoffs, tech investors — an inherently optimistic bunch — couldn’t wait to jump on a hot trend.
No field is more exciting than generative artificial intelligence, which refers to technologies that can generate text, images, sounds and other media based on brief prompts.Investors, pundits, and journalists have been talking about AI for years, but the new wave—the result of more than a decade of research—represents a stronger, more mature AI
This type of artificial intelligence promises to reshape everything from online search engines like Google to photo and graphics editors like Photoshop to digital assistants like Alexa and Siri. Ultimately, it could provide a new way to interact with nearly any software, letting people chat with computers and other devices as if they were chatting with another human being.
That sent deals around generative AI companies into overdrive. Jasper, a generative AI startup founded in 2021, raised $125 million in October at a valuation of $1.5 billion. Stability AI, an image generation company founded in 2020, raised $101 million that same month at a $1 billion valuation. Smaller generative AI companies, including Character.AI, Replika and You.com, have also been inundated with investor interest.
According to PitchBook, which tracks financial activity across the industry, investors will pump at least $1.37 billion into generative AI companies in 2022 through 78 deals, nearly as much as they have invested over the past five years combined.
OpenAI’s $29 billion valuation is earlier reported By The Wall Street Journal. Venture capital firms Thrive Capital and Founders Fund may buy stakes in the tender offer, two people familiar with the matter said. Because OpenAI started out as a not-for-profit company, it’s difficult to pinpoint its valuation precisely.
OpenAI, Thrive Capital and Founders Fund did not comment on the proposed investment.
A number of companies have been developing generative AI for years, including tech giants such as Google and Meta as well as ambitious start-ups such as OpenAI. But the technology didn’t catch the public’s attention until last spring, when OpenAI unveiled a system called DALL-E that lets people generate realistic images simply by describing what they want to see.
This inspires entrepreneurs to pitch new ideas and investors to hype disruption. Their enthusiasm reached new heights in December after OpenAI released ChatGPT, fans using the technology to generate love letters and business plans.
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“This is the new ‘mobile’ paradigm shift we’ve been waiting for,” said Niko Bonatsos, an investor at venture capital firm General Catalyst. “Maybe bigger.”
Sequoia Capital Investors wrote Generative artificial intelligence “has the potential to generate trillions of dollars in economic value,” said Lonne Jaffe, an investor at Insight Partners. “There’s definitely an element to it that feels like the early days of the internet.”
Google, Meta and other tech giants have been reluctant to release generative technologies to the wider public because these systems often produce toxic content, including misinformation, hate speech and biased images of women and people of color. But newer, smaller companies like OpenAI — less concerned with protecting established corporate brands — are more willing to make the technology public.
The techniques needed to build generative AI are widely known and freely available through academic research papers and open-source software. Google and OpenAI have an advantage because of their deep pockets and the raw computing power that is the cornerstone of the technology.
Still, in recent months, many top researchers from Google, OpenAI, and other leading AI labs have struck out independently to find new startups in the field. These startups have raised some of the largest funding rounds, and the excitement around ChatGPT and DALL-E has led venture capital firms to invest in more young companies.
More than 450 startups are now working on generative AI, through A VC firm countsThe frenzy was fueled by investors scrambling to find the next big thing in a bleak environment.
Michael Dempsey, an investor at venture capital firm Compound, said the tech downturn — which last year included a cryptocurrency crash, underperforming stocks and layoffs at many companies — has created calm among investors.
Then “everyone got excited about AI,” he said. “People need something to tell their investors or themselves that, honestly, there’s an exciting thing coming up.”
Some worry that the hype surrounding generative AI has outstripped reality. The technology raises thorny ethical questions around how generating artificial intelligence could affect copyright and whether companies need permission to use the data that trains their algorithms. Others believe that big tech companies such as Google will quickly beat young upstarts, while some newcomers have little competitive advantage.
“There are a lot of teams that don’t have any AI capabilities and market themselves as AI companies,” Mr. Dempsey said.
Those concerns haven’t dampened the excitement, especially after Stability AI came out in October.
The startup helped fund an open-source software project that quickly built image-generating technology that operates much like the DALL-E. The difference is that while OpenAI shared the DALL-E with only a handful of testers, Stability AI’s open-source version — Stable Diffusion — is available to anyone. People quickly used the tool to create photorealistic images of everything from medieval knights crying in the rain to Vincent van Gogh painting Disneyland.
In the ensuing excitement, Eugenia Kuyda, founder and chief executive of chatbot startup Replika, said in an interview that she was contacted by “every single venture capital firm in Silicon Valley” or more than 30. She took their call but decided not to provide additional funding because the company she founded in 2014 was profitable.
“I feel like someone who arrives at the airport a week early for their flight — and now the flight is boarding,” she said.
Another chatbot company, Character.AI, and You.com, which is adding chat technology to its Internet search engine, have also received significant interest from venture capitalists, the companies said.
Sharif Shameem, an entrepreneur who built a searchable database of images called Lexica for Stable Diffusion in August, says his tool quickly attracted 1 million users — a sign he should start from the existing Startups turned to focus on Lexica. Within weeks, he had raised $5 million in funding for the project.
Mr Shameem likened the moment surrounding generative artificial intelligence to the advent of the iPhone and mobile apps. “It feels like one of those rare opportunities,” he said.
Mr. Jaffe of Insight Ventures said his firm has since encouraged the majority of companies in its portfolio to consider incorporating generative AI technology into their products. “It’s hard to imagine a company that can’t use it in a certain way,” he said.
Radical Ventures, a venture capital firm based in Toronto, one of the global centers of artificial intelligence research, was founded five years ago specifically to invest in such technologies. It recently launched a new $550 million fund dedicated to artificial intelligence, with more than half of its investments in generative AI companies. Now those bets look even better.
“For four and a half years, people thought we were crazy,” says Jordan Jacobs, a partner at Radical. “Now, for the past six months, they’ve been thinking we’re geniuses.”
